leverage – Page 2

September 21, 2011

Mike Brown, who coached the Cleveland Cavaliers for 5 years. He won 272 games, lost 138, and in 2009-10 led Cleveland to the best record in the league. Dan Gilbert rewarded him for his loyalty with a pink slip. (Or maybe Gilbert fired Brown for carrying a purse, which we would enthusiastically support.)

We love to rail against corporate slavery here, the explicit message being that if you really enjoy your job and concomitant station in life, have at it. But you probably don’t, and instead of whining about it you should take a chance. Or just wait a few decades and regret it, but it’s up to you.

Here, we’ll let commenter Monica explain it:

As a former hourly employee of a business that made it nearly impossible to leave on time, didn’t pay overtime wages, and expected work to be done at home, this article reminded me of why I took a risk and quit. I swallowed my pride, didn’t complain, and stuck it out to help my family. I have a strong work ethic and would never consider giving less than 100% at my job. After four years of dedication, excellent work and client reviews and awards, I received… wait for it.. a card and a cupcake when I left. I think many people find that companies are far less invested in their employees and seem less inclined to reward them for good work and loyalty. It is a shame because recognition and appreciation encourage employee productivity and longevity. Just my opinion…

People confuse “loyalty” with “honor”. They’re not synonyms. Honor means that you owe your employer whatever you agreed to as conditions of the job. Don’t cut out at 4:30 if the workday ends at 5:00.

If the workday starts at 9 and you get there at 8:15 in the hopes that someone influential notices, what have you proven? Here, we’ll do it in the form of a patented Control Your Cash multiple-choice test:

__That they should think of you the next time a promotion comes up.
__That they can throw extra work at you, maybe so much so that they can even save themselves the trouble of hiring an additional person.

As for loyalty, that’s a faithfulness you have to a family, a spouse, a country. Those are entities that you (presumably) share a goal with. Loyalty to an employer is a falsehood. Among other reasons, because you have different goals:

Your goal is to facilitate your career: your employer’s is not. Your employer’s goal is to turn as big a profit as possible. The two goals might overlap somewhat, but that’s not your employer’s concern.

Employers know this. They understand that it’s human nature to not question authority. This doesn’t mean you shouldn’t question your elected representatives (which, many of us seem to forget, are our employees.) Far from it. It means you should question your employer if you’re expected to do something beyond what you’ve agreed to. And that you shouldn’t succumb to pressure to do otherwise.

Telling most people to stand up for themselves is like telling a newborn baby to go to the store and run some errands, but we’ll continue.

We’ve had a year to put the following illustration of this in perspective. Last July, after 7 years of Hall of Fame-worthy play as a Cleveland Cavalier, a young multimillionaire named LeBron James exercised his ***RIGHT *** to file for free agency. The terms of his employment explicitly allowed this. He owed it to himself to exercise this right. Not doing so would be like taking only 2 weeks of vacation despite being allowed 3.

Even if you’re not a basketball fan, you probably know what happened next. James signed with a conference rival, and became as hated in Cleveland as Benjamin Netanyahu is in Gaza.

Millions characterized James leaving town as “betrayal.” You know, because wanting to find a new basketball team to play for is the equivalent of condemning The Savior of Mankind to a grisly death for 30 pieces of silver.

James irreparably severed his relationship with the idiot basketball fans of Cleveland, but that’s not the point. We can’t expect them to act rationally, and besides, they had no skin in this game. James’s employer/employee relationship, on the other hand, went to strange new places.

His now-former employer, billionaire Dan Gilbert, violated the Universal Boss Code. In a stunning display of childishness he exposed his feelings and let the world know that in his eyes, James’s only value as a human was in the difference he made to his, Gilbert’s, bottom line. For good measure, Gilbert added “selfish”, “heartless”, “callous”, and “cowardly” to his list of adjectives. Gilbert went way past infantile, reducing the prices of James-themed merchandise to $17.41 (in pennies, the year of Benedict Arnold’s birth.)

James earned $62 million in salary during his tenure under Gilbert, which means Gilbert must have profited by at least that much by having James around.

Substitute your own name for James’s above, your employer’s for Gilbert’s, and whatever you’ve earned for James’s salary (if it’s at least $62 million, kudos.)

Clearly whatever profits Gilbert was enjoying by keeping James around were worth holding onto. Otherwise Gilbert wouldn’t have worked so hard to keep James in Cleveland, and reacted so impetuously when James exposed a crucial truth: there are limits to a boss’s power. A smart employee can transcend those limits. This particular boss was willing to embarrass himself, in order to keep a valuable employee who understood his own worth in the marketplace. You can expect your own employer to harbor similar feelings if you start being cognizant of your own worth.

If you do, your employer will have to pay you more, accommodate your wishes, make your life a little easier. No employer will do this willingly, and most will start the negotiations by belittling you and making you doubt yourself. The idea of a self-aware employee scares most employers more than an audit does.

Did James sign elsewhere specifically to irk Gilbert? No, that was an ancillary benefit.

Presumably, you have at least a few professional non-monetary goals. James did, and like most pro athletes his include a world championship. He was already making huge money, and would continue to regardless of where he signed. Therefore, other aspects of his job became important. Exercising his right to free agency (which, by the way, you have too), he chose to work for an employer who lured him away by:

conducting operations in a beautiful city with a perfect climate, as opposed to the rusty chill of Cleveland
taking the idea of winning a championship seriously, by assembling a roster that didn’t consist of 11 stiffs.

James might have won a title in Cleveland had he stuck around long enough. But he came as close to winning one in his first year in Miami as he did in 7 years in Cleveland, advancing to the NBA Finals and taking it to 6 games. And he didn’t freeze half the year while doing it.

Meanwhile, James’s former team set a record by losing 26 consecutive games. James’s departure cost the Cavaliers an additional loss every other game. Maybe the Miami Heat got a bargain.

An elite financial engine like LeBron James can find himself a better situation. There’s no reason you can’t too.

**This article is featured in the Best of Money Carnival #122**

**This article is featured in the Totally Money Blog Carnival Celebrity Roast Edition**

The Wealthy Really Are Better Than You

September 9, 2011

Better than you. Better-looking, too, if you're Henry Waxman.

Sooner or later, every website with a passing interest in personal finance posts some version of “The X Habits of Wealthy People”. You know how these lists are going to end before they start. Yeah, rich folks spend less than they earn and don’t drive ostentatious cars. Great, what else you got?

First, that’s not even true. Just because Warren Buffett inexplicably lives in a 53-year old house doesn’t mean that Larry Ellison or Paul Allen does. Despite what you’ve been told, frugality is only a tiny part of this. (But frugality is also the easiest personal finance subtopic to write about, which is why right now some idiot personal finance blogger is crafting a post on how you can save .1¢ per wipe if you buy toilet paper by the ton.)

A note on frugality: when I was 14, my best friend’s father was a successful eyeglass salesman. Regional sales manager, or something. Knowing I’d be entering the workforce soon, and wondering what I’d have to do to beat out the other applicants for that first coveted busboy position, I asked him what he looked for when hiring. His answer?

“Big spenders. I want a guy who orders the lobster and the most expensive bottle of wine, who wears Harry Rosen suits and drives a BMW.”

Why?

“Because he’ll be motivated. He’s got bills to pay and a lifestyle to maintain, so he has to make his quotas whether he wants to or not.”

There are plenty of people who spend less than they earn and who drive Ford Tauri. The vast majority of them aren’t rich.

If you’re not rich, and see no prospects of ever becoming rich, it’s not because you aren’t working hard enough. This should be obvious. Even if you cut out early every afternoon and only work 35 hours a week, how many hours a week do you think the world’s hardest-working rich person is putting in? 350? 35,000? No, clearly the relationship between hours put in and rewards achieved is not a direct one. Or at least not a linear one.
Here’s what rich people do that really does distinguish them from ordinary folk. These are easy to adopt, and don’t even require you to sacrifice that much in the short term, if at all. You just need to think differently.

1. They understand leverage. And its offspring, passive income. There’s an entire generation of financially responsible but unimaginative people who blame the Great Depression for their failure to lead dynamic lives, and who took the mantra “neither a borrower nor a lender be” as Scripture. (It’s actually Shakespeare. Hamlet.) Fortunately, those people are dying off.

Spend money to make money. And borrow it, too. You borrow money to leverage your existing assets. You don’t borrow money to finance a vacation. A 6% commercial bank loan to purchase an office building, whose offices you then lease out to tenants, who make rent payments to you that a) you use to cover your mortgage payments and b) write off your taxes, while you keep the difference, is money well borrowed. An unimaginative frugal person who doesn’t know any better sees that original bank loan as a sleeping tiger. A rich person sees it as the first step to a sustained cash flow.

2. Rich people aren’t “being lived”. As opposed to living. No wealthy person beseeches anyone for a raise. Or does the prep work, explaining his worth to the company and why he’s entitled to more. Being rich starts with the self-determination, as counterintuitive and pollyanaish as that sounds.

The thing is, you probably know this instinctively. Who’s more likely to get rich:

a) The college-educated junior account coordinator who stays late and delivers her sales reports to the boss a day early, hoping to get noticed to the point where she can become an account executive one day and do more of the same, or
b) The immigrant with a shaky command of English who borrows from his cousin to open a falafel stand?

The first couple of years, their incomes might not differ by much. The immigrant might even work longer hours. But his success is contingent on him, and no one else. So is his failure, if any. No one can promote him, but no one can fire him. The point isn’t that all immigrant food vendors get rich. The point is that by living self-determined lives, they’re in a better position to create wealth than the junior account coordinator who’s waiting for the person above her to transfer/get fired/have a baby.

If a rich person wants more money, he creates it. By soliciting another client. By creating and promoting another product. By using another passive income stream. Not by hoping to catch the boss during one of his rare generous moods.

3. They care about output, not input. See our prior post about this.

It doesn’t matter how many hours you worked, it matter how many widgets you created. In fact, it doesn’t even matter how many widgets you created, it matters how much revenue they brought in. And even that is less important than how much profit they generated. (And if you don’t understand the difference between revenue and profit, buy the freaking book already.)

Or take the office building example from above. Once you get enough good tenants in there to fill it, the money starts flowing in with marginal effort. If Tim Cook flies to Helsinki for a ski trip next week instead of going to work, a few thousand iPads are still going to be sold. But the employee who relies on income for sustenance has to apply himself for every dollar. Which brings us to:

4. Wealth ≠ income. Not even close. There’s a reason why the ultra-rich usually keep quiet when Congress discusses raising tax rates on high-income people. Because confiscating more and more of a hard-working person’s income has little bearing on a rich person’s ability to build wealth. Capital gains, IRA proceeds, investment appreciation…whatever its name, money that they don’t directly work for is what separates the rich from the never-will-be.

5. Dust yourself off. Even if you don’t pick up as many clients as you like, or go half a day without having to open the register, a wealthy-person-in-training has a permanent internal motivator; memories of how badly life sucked taking orders at the old job.

6. (Of course) Buy assets, sell liabilities. Put $150 a month in an IRA, or put it in cigarettes by the carton?

**Best Article of the Week in the 121st Edition of the Best of Money Carnival**

Where’s your loyalty?

The Wealthy Really Are Better Than You

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